Implications of becoming a charity

Being registered as a charity with the Canada Revenue Agency (CRA) brings certain benefits to an organization but also several challenges and regulatory obligations. Before applying for registration, you should satisfy yourself that the benefits outweigh these challenges and obligations, and that there is no better alternative available for you. 

Benefits of being a charity

There are three basic advantages of being a registered charity. Registered charities:

• can issue official tax receipts to donors;
• receive favourable income tax treatment; and
• benefit from the perception that their organization is doing good work.

Issuing official receipts

Tax receipts provide a benefit to donors and can be a significant factor in strengthening fundraising activities. Consider the impact of tax receipting on the following types of potential donors:

• Individual donors. Individuals benefit by using charitable tax receipts to reduce the amount of income tax they pay.

• Business donors. Some businesses can benefit by reducing their taxable income based on receipted donations. But many businesses support charities by sponsorship rather than donations, and these expenditures are often a tax-deductible business expense. In this case, a tax receipt is of no additional benefit to the business.

• Foundations and charitable organizations. Foundations and charitable organizations are generally able to make gifts only to organizations that are registered charities. Registered charities that receive such gifts should not issue tax receipts for them, however.

• Governments. Governments are not limited in who they provide funds to, although some government programs may fund only registered charities.

Receiving favourable tax treatment

Registered charities do not pay income tax on their earnings.

When it comes to the Goods and Services Tax (or Harmonized Sales Tax or Quebec Sale Tax), charities are actually in a less favourable position relative to businesses. Whereas businesses generally get back, through input tax credits, all of the GST/HST/QST that they pay, charities normally are rebated only half of the tax they pay. This can be a more significant issue in some situations than income taxes, particularly if the charity is not anticipating a surplus of revenues over expenditures, since it must pay GST/HST/QST as applicable.

Benefiting from the perception that the organization is doing good work

Being a registered charity evokes a positive image in the minds of most Canadians. This encourages people to support charities. It is also often a factor in the mind of the individual behind a charity's formation.

Some Canadians feel that registered charities are regulated and overseen to a greater degree than are other nonprofits, and so have a greater degree of confidence when donating. While they are indeed subject to more regulation, fulfilling the regulatory obligations and retaining charitable status is not trivial. These obligations must be balanced against the benefits outlined above.

Control over charities

One motivation common to many people who want to start a charity is the desire to maintain control, either over "their" program or activity, or over "their" funds. This motivation, while generally well-intended, is misplaced.

Control rests with the board of directors, which has legal responsibilities to the organization itself and its charitable purpose, not with the founder. Regulatory constraints exist about what any registered charity may legally do. 

If a high degree of control over the intended activities (in the case of a charitable program) or over ongoing funding (in the case of a private foundation) is a primary consideration for the founder, there are alternatives that may be more attractive than charitable registration.

Challenges faced by new charities

People who want to start a charity generally want to establish either a charitable organization (that primarily runs charitable activities) or a foundation (that typically makes donations to other charities that meet its objectives). These two types of organizations face some common and unique challenges.

A charity must:

• be a legal entity. Often a charity is a corporation. As a corporation, the charity generally needs bylaws, policies and procedures, meetings of members, minutes of meetings, proper books and records of account, and so on.

• have a board of directors that will lead the organization. Often, a minimum of three directors is required, with regular directors' meetings and minutes. Directors can have a measure of personal liability for the actions of the charity, which means that there is risk associated with serving as a director.

• have only eligible directors.

• comply with various legislative and regulatory requirements, including those of the CRA.

• have the resources to actually carry out the mission of the organization, whether that is charitable programming or making grants.

An operating charity must also raise all the funds it needs to carry out its programming, in addition to paying for the above responsibilities. Fundraising itself is a specialized function that may require dedicated volunteer or staff resources to raise sufficient funds. Along with fundraising come responsibilities to funders, such as only using funds in accordance with the funders' wishes, reporting back to and recognizing funders, and so on.

A foundation, by contrast, may not have to worry about raising funds if it has been endowed by its founder. But it will have to:

• use some of its funds to pay for the above responsibilities, 

• manage and effectively invest its funds, 

• research and make prudent granting decisions, and

• follow up on grants to ensure that funds were used appropriately and in accordance with the foundation's mandate and the specific terms of the grant.

Regulatory obligations of a registered charity

Registered charities are governed by the relevant requirements of the Income Tax Act. Registered charities must:

• engage only in allowable activities. A charity is generally required to engage only in charitable activities that support its charitable objects.

• keep adequate books and records. While there are no specific requirements about how or what books to keep, they must be clear and complete so that CRA can verify that the charity is carrying on its charitable activities according to its charitable purposes. Generally, the records must include:

  • Governance documents – corporate records, meeting minutes, and reports;

  • Financial information – bank statements, journals, general ledger, tax receipt copies, payroll records, investment documents, and financial statements and reports; and

  • Source documents – invoices, paid cheques, deposit slips, credit card statements and chits, contracts, e-mails, and memos.

• issue complete and accurate donation receipts. CRA specifies exactly what information is required on a tax receipt. Also, any calculations or other information supporting the value of gifts and advantages must be kept.

• meet annual spending requirements. 

• file an annual T3010 information return. An annual return must be completed and filed with CRA within six months of the end of the fiscal year. Failing to file the return will result in the charity's registration being revoked by CRA.

• maintain the charity's legal status. This includes having an annual general meeting, elections of directors, appointment of auditors, and so on.

• inform CRA's Charities Directorate of any changes to the charity's mode of operation or legal structure. Charities should advise CRA in writing of significant changes that affect their operations, legal status, or how to contact them.